Currency forecasts for the next 6-12 months: April update from Nordea

  • Nordea Investment Bank 2022-2023 Foreign Exchange Rate Forecast – April 2022 Update
  • The Federal Reserve’s series of rate hikes will further boost the dollar in the near term.
  • The war in Ukraine will undermine the Euro, with EUR/USD plunging to 1.05 in 3 months.
  • USD/JPY will peak above 130 before gradually losing ground.
  • The dollar is expected to weaken in 2023 as the US economy weakens.
  • BoE rate hikes will protect the pound with GBP/USD gains to 1.40 at the end of 2023.
  • Commodity currencies will make limited net gains.

Dollar benefits as Fed leads global central bank charge

Nordea notes that major central banks are now engaged in a major tightening of monetary policy in an effort to fight inflation.

bannerThe bank also expects policy divergence to be a key driver of global exchange rates over the next several months at least, with aggressive early movers seeing currencies strengthen.

According to Nordea; “Central banks acting first and sending hawkish signals experience well-supported currencies while laggards among central banks leave their currencies weakened and vulnerable.”

As for the Federal Reserve, Nordea expects there to be rate increases of 50 basis points at the May and June meetings.

He also expects there will then be a series of 25 basis point increases at each meeting until the middle of 2023.

This would take short-term rates to a peak of 3.5% by mid-2023 and above current market prices.

Euro: ECB caution will prevail, war in Ukraine undermines euro support

Nordea notes that the ECB is also facing a spike in inflation which will increase the pressure for decisive action.

The bank notes the possibility of a rapid rate increase, but expects the central bank to be more cautious.

He adds; “it is more likely that the ECB will avoid the feeling of being in a big rush.”

Overall, he expects the ECB to wait until the end of the third quarter; “We expect a first ECB hike at the September meeting, followed by a second rate hike in December.”

Given the negative economic consequences, Nordea expects the war in Ukraine to be a negative factor for the single currency; “The euro will remain vulnerable as long as there is no positive change in the war in Ukraine. The tension between Europe and Russia leaves great uncertainty hanging over the economic outlook in the euro zone and the euro.

Nordea expects the combination of monetary policy trends and the war in Ukraine to further strengthen the dollar in the near term.

In this context, the bank now expects the euro to dollar (EUR/USD) exchange rate to weaken to 1.05 over a 3-month period.

US Dollar: The Tide Turns Later in 2022

The bank, however, expects the dynamic to gradually change, especially as the US economy begins to come under pressure later this year. He notes; “The sharp decline in US household purchasing power will slow economic growth in the US, and the Fed’s aggressive monetary tightening will also have an impact.”

Nordea expects a bigger turn next year as attention shifts to lower US interest rates; “In 2023, the Fed will approach the peak of its up cycle and attention will turn to the timing of the first potential cut from the US central bank.”

Overall he predicts a weaker US dollar in 2023.

Yen: USD/JPY unsustainable above 130

Nordea expects the Japanese yen to remain under pressure in the near term, with any intervention by the Bank of Japan having no lasting impact if there is no change in fundamentals. He adds; “Entering a period of intervention in the FX market is a possibility, but the impact on the yen is unlikely to leave a lasting impact on the yen if the BoJ continues to buy JGBs at the same time.”

Nordea therefore expects USD/JPY to break above the 130.0 level in the near term, but then weaken in 2023.

The Swiss franc is expected to gradually weaken against the euro as the ECB gradually tightens its policy.

Pound sterling: BoE rate hikes protect the pound sterling

Nordea notes that there have been several shifts in market expectations for Bank of England policies, but expects inflation to force the bank to act with further rate hikes.

Overall, Nordea is more optimistic than most investment banks on the outlook for sterling.

“We expect the BoE to move its key rate to 1.75% by the end of the year (currently at 0.75%) and that should support the pound going forward.”

He expects the euro to pound exchange rate (EUR/GBP) to stand at 0.81 at the end of the year, which would be a six-year low.

Commodity currencies should be resilient in the near term and with room for gains over the forecast period, especially as the US Dollar loses ground.

Table of Nordea currency forecasts covering the period 2022-2023.

Pair place 3 months Dec 2022 June 2023 Dec 2023
EUR/USD 1.08 1.05 1.10 1.13 1.16
USD/JPY 128 133 127 123 120
GBP/USD 1h30 1.28 1.36 1.38 1.40
EUR/GBP 0.83 0.82 0.81 0.82 0.83
EUR/CHF 1.03 1.01 1.03 1.05 1.07
AUD/USD 0.74 0.75 0.77 0.78 0.79
USD/CAD 1.25 1.25 1.23 1.22 1.20
USD/USD 0.68 0.70 0.72 0.73 0.74